Ch. 1 Flashcards
Exchange Transaction
Transfer, each side got something (what businesses engage in)
Nonexchange Transaction
True donation; one-sided
What is the purpose of a business?
To increase owner’s wealth and consistently make a profit
What is the purpose of government?
To provide services for public safety, infrastructure, education, and recreation
What is the purpose of a nonprofit?
To provide services, usually target one service
Examples of nonexchange transactions?
1) Real estate taxes - paying for education, fire house, police, etc. which are services, but not because you used them
2) Income taxes - roads, etc. which are services but not because you used them
It is a government if it meets one or more of the following criteria:
1) Officers are popularly elected or the board is appointed by government officials
2) Hold power to enact and enforce a tax levy
3) Hold power to directly issue debt whose interest is exempt from federal taxation
4) Face the potential that a Government might unilaterally dissolve them and assume their assets/liabilities
Examples of governments?
Local school districts, Water districts, Fire districts, Public Libraries, etc.
How do you determine the classification of an entity?
1) Is it a government? Yes = You are done. If no, then:
2) Is it a nonprofit or a business?
Who is required by law to have a budget?
Governments are required.
Nonprofits are not required, but most still have a budget.
Stakeholder
Interest in/supporting/employee of an organization (their success is in your best interest)
Tax assessment is based on?
The budget, not actual spending
What is the purpose of financial statements?
To communicate data to the users (decision-makers)
Restrictions
Think external
If someone donates money, it has to be used for what they want
Must be reported this way - for specific purposes
Are funds restricted when they are set aside by the board?
No, there is no such thing as an internal restriction. The board can change their mind and reallocate the money towards other things.
Most nonprofit reporting falls under FASB, which helps asses?
1) services provided/ability to continue providing these services
2) How efficient they are
3) Performance
***Can be hard to measure the success of a nonprofit
Fund Accounting
Segregates an entity’s assets and liabilities into separate accounting entities based on legal requirements, debt covenants, donor-imposed restrictions, or special regulations
What is the purpose of fund accounting?
It helps ensure that resources are spent on the intended purposes
Accrual Basis of Accounting
Revenues are recognized when they are earned and measurable
Modified Accrual Basis of Accounting
Revenues are recognized when they are earned and available
Accrual Basis of Accounting: Expenses
Revenues are either matched to the cost or the time period
Modified Accrual Basis of Accounting: Expenses
Do not call them expenses, they are expenditures
Just an outflow of resources, do not worry about the time period
